Doing Business in US States: What Should Be Considered

What this is  When forming an entity to do business in the U.S. there are many considerations in advance of forming your entity that require legal and/or tax advice to determine the most favorable state to form your company, what entity type (i.e., corporation vs. limited liability company) and what states your company will be transacting repeat business or have financial nexus in.  

What this means Once your legal and tax advisor review where your business has a physical presence, employees, or significant revenue in any state, or when you regularly enter into contracts and/or have financial nexus, decisions on where to qualify or register to do business and what is required will be an important component of your entity governance and compliance for your company. 

What is Next after Legal and Tax Advice? Partnering with your Registered Agent and Legal Counsel on the Secretary of State Filings 

Once the decision on where to qualify to do business for your company either in the early stage of doing business or as your business grows, a filing of an Application for Authority along with the designation of a registered agent will be required.  

Professional registered agent companies can assist with the filings with the Secretaries of States and be a partner with your legal counsel or your in-house counsel or your compliance team to ensure these filing are filed timely. 

The information required on each state Application for Authority, timing of filing to secure an effective date to do business in each state and the Secretary of State annual and periodic report compliance are important considerations to be aware of.  The professional registered agent company you engage will further.  

Possible Consequences of Doing Business in a State Without Registering 

Inability to Initiate a Lawsuit 

The laws of most states indicate that a company cannot bring suit in a court of law, unless it is registered to do business in that state.  In many states, the court may issue a stay until such time as an unregistered company qualifies, but the decision to do that is at the court’s discretion. 

Significant Delays 

In some states, it can take a very long time to register if the company has been doing business in the state prior to registration. For example, a New York corporation is required to indicate on the Application for Authority either that they have not been doing business in N.Y. prior to registration or attach the consent of the New York State Tax Commission.  

Obtaining this consent requires the submission of a “Statement of Activities” form to the N.Y. State Department of Tax and Finance, which will review its records to determine whether the entity has been paying the required taxes and issue consent. It is not uncommon for a corporation to wait six months for the consent to be issued. These delays can cause serious issues if the company is hoping to bring suit or trying to arrange financing or licensing, as being properly registered is often required in these cases.  

Monetary Penalties 

Many states penalize companies monetarily when they do not register in a timely way. Paying all back taxes and fees from the time the company began doing business is a common requirement and many states also add penalties and/or interest. While states often cap these penalties, they can still often be extremely high, for example Nevada’s cap is $10,000 per year. States are also actively pursuing companies when it is determined they are operating in the state without having registered. 

Penalties Imposed on Officers, Directors and Registered Agents 

The statutes for a handful of states indicate that penalties can be imposed on the directors, officers or agents if their company transacts business without registering. California is one of these states. Section 2259 of the California Corporations Code indicates that a person who “transacts intrastate business on behalf of a foreign corporation, knowing that it is not so authorized, is guilty of a misdemeanor”. 

Penalties for Not Maintaining an Entity 

Once an entity is registered as a foreign corporation, it usually needs to regularly file periodic reports and, in some states, pay franchise or income taxes to maintain that registration. Failure to do so results in the company falling out of “good standing”.  There are a number of penalties for falling out of good standing. 

Inability to Bring Suit 

A court can determine that a company that is revoked or voided has no more standing to bring suit in state court than a company that never registered at all. 

Difficulty in Obtaining Financing 

A Good Standing Certificate from every state where the company is doing business is a common requirement for loan agreements and financing. A company will need to remedy any voided or revoked registrations before it is able to obtain a loan. 

May Be in Breach of Representation and Warranties Under Financing Agreements 

Financial agreements often contain representation and warranty clauses that require the company to maintain its good standing status. Losing that status could mean the company is in breach of the “reps” and warranties. 

Time Consuming and Expensive to Remedy the Situation 

Depending on the state, it can be as difficult and time consuming to reinstate a company in bad standing as it is to authorize a company that was doing business prior to qualification. In some states, such as Maine, Utah and Washington among others, reinstatement is not permitted at all; the company must submit a brand-new qualification. A consequence of this scenario is the company loses the historical legacy of being formally registered since it first began doing business in the state. 

Conclusion 

Timely registration and ongoing compliance are essential for companies doing business across state lines. Failing to register can lead to costly penalties, delays, and legal challenges. With careful planning and attention to state requirements, businesses can avoid unnecessary risks and maintain good standing during the lifecycle of their businesses. 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.